Wall St. Gears Up For The World’s Biggest Oil Trade

International banks are preparing for the Hacienda Hedge – the secretive oil deal that has seen Mexico earn billions from successful bets on future oil prices. Detailed in an analysis by Javier Blas for Bloomberg, the history of the Hacienda Hedge is certainly impressive and might incite other countries to try their hand at betting on future oil prices. Or then again, it might not, as Mexico’s success story seems to be kind of unique.

Blas interviewed Mexican government officials, traders, brokers, and bankers, and reviewed thousands of documents to compile the history of the bet that bankers await every year and that, contrary to what the Mexican authorities say, could swing the oil market.

The story began in 1990, when Iraq’s invasion of Kuwait took one-tenth of the global oil supply off the market, raising prices. The government then accurately predicted that the high prices wouldn’t last, betting on a decline. This accuracy has been remarkably consistent through the years, with Mexico making money most of the time when it has placed the bet. And it hasn’t been alone.

The first bank that Mexico hired to purchase put options for crude oil was Goldman Sachs. Then Morgan Stanley followed, and by the next decade, the two banks were known as “the Wall Street refineries.” Soon enough other banks smelled the sweet scent of profits and joined the party—most notably Barclays, which had no experience with commodities before the mid-2000s. Other banks that got on board for the Hacienda hedge include HSBC, BNP Paribas and Citigroup—but not UBS or Credit Suisse, which seem to be more risk-averse despite the potential for fat profits.

Now, oil and gas hedging is standard practice for airlines and energy producers, among others, as they seek to either insure themselves against higher prices or lock in future profits. With the Hacienda hedge, Mexico seeks to make a buffer for its budget in case of rough oil market waters, Blas notes. Even so, the deal has a huge disruption capacity simply because of its size: last year, Mexico made $2.7 billion from the hedge and the year before it made $6.4 billion.